With health care reform in a state of political limbo, Senate leadership is busy assembling a job-creation package that is likely to be the chamber’s next significant legislative effort.

Just before Christmas recess, the House hastily assembled and adopted a $154 billion spending package. In response, the Senate Finance Committee is working on a package that focuses more on tax relief than the House counterpart. As reported by Dow Jones:

The package would be paid for largely by re-directing funds that were available for the government’s bank bailout program, according to an outline dated Friday of possible measures being considered for inclusion in the bill.

The Senate document put the total cost of economic stimulus measures in the bill at $82.5 billion. A Senate Democratic aide cautioned that the document doesn’t reflect the most recent conversations among leaders about the plan, and some elements may change considerably.

A broad outline pitched to the Democratic conference today included pension relief, SBA lending provisions, energy efficiency tax credits, export promotion (IC-DISC users take note) and a proposal that would “provide a tax credit for between 10%-20% of increased payroll to encompass both hiring of new workers and increasing part-time workers to full-time status.”

Tax policy veterans should recognize the employment tax credit idea from years past. Among others, Senator Kerry offered something similar as part of his Presidential platform in 2004. The proposal has been always been viewed skeptically, however, over concerns that it is poorly-targeted and only rewards those businesses that would hire new workers anyway.

Regarding timing, it’s still up in the air but we anticipate a Finance Committee markup in the next two weeks followed by floor consideration after the President’s Day holiday.

So what are your S-CORP takeaways? First, there’s an incredible amount of pent-up demand for tax policy in the Senate, and we expect this legislation to open the floodgates. It’s a tax vehicle, after all, so how can Chairman Max Baucus and Majority Harry Leader Reid keep extenders, energy tax incentives, and (perhaps less so) an estate tax fix on the sidelines once it starts moving?

Second, lots of other items are likely to catch a ride as well. Extended UI and Cobra benefits expire at the end of February, as does the temporary Doc Fix for Medicare payments. The timing of this package suggests those provisions stand a good chance of being included.

Finally, expect lots of message amendments regarding the expiring Bush tax relief. It all goes away at the end the year, after all, and none of the provisions listed above address this underlying policy challenge.

CBO Updates Budget Outlook

The CBO issued itsB outlook for 2010-20 today. Here’s the CBO on the short-term outlook:

CBO projects, that if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. At 9.2 percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4 trillion) posted in 2009. Last year’s deficit was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year’s shortfall.

And the longer term outlook:

Under current law, the federal fiscal outlook beyond this year is daunting: Projected deficits average about $600 billion per year over the 2011-2020 period. As a share of GDP, deficits drop markedly in the next few years but remain high, at 6.5 percent of GDP in 2011 and 4.1 percent in 2012, the first full fiscal year after certain tax provisions originally enacted in 2001, 2003, and 2009 are scheduled to expire. Thereafter, deficits are projected to range between 2.6 percent and 3.2 percent of GDP through 2020.

And the impact on debt:

Under current law, the federal fiscal outlook beyond this year is daunting: Projected deficits average about $600 billion per year over the 2011-2020 period. As a share of GDP, deficits drop markedly in the next few years but remain high, at 6.5 percent of GDP in 2011 and 4.1 percent in 2012, the first full fiscal year after certain tax provisions originally enacted in 2001, 2003, and 2009 are scheduled to expire. Thereafter, deficits are projected to range between 2.6 percent and 3.2 percent of GDP through 2020.

And none of this includes the cost of health care reform, the so-called Medicare Doc fix, extending some or all of the Bush tax relief, the new stimulus provisions, or any of the other expiring provisions. Ouch.

With a deficit outlook like this, the Obama Administration is being pushed in two directions these days. They face demands to increase federal spending in the short run to help the economy while also being told they need to cut spending in the long-term to address the deficit and debt.

One way to deal with this conflict is to substitute smaller, less expensive proposals for the broad, macro reforms that have characterized the Administration’s agenda. President Clinton adopted this approach for many of his State of the Union addresses. As CNN reported after his 1999 address:

President Bill Clinton’s 1999 State of the Union address was classic Clinton. It was another long laundry list of proposals, some conservative, some liberal. Clinton’s 77-minute speech was so overflowing with proposals that by the time it ended it was almost hard to remember that Social Security was the first and most important proposal of the evening. In previous years, commentators criticized Clinton for this approach, complaining that the State of the Union should be more focused. But this year, most commentators simply gushed.

So did viewers, who typically gave Clinton’s annual State of the Union speeches higher marks than professional commentators.

President Obama’s proposal to increase the child credit is a worthy successor to the Clinton approach. The proposal would increase the value of the credit, but not as much as one might expect. It’s not going to be refundable, which means most families with children would not benefit until their incomes rise above $40,000 or so. And it’s capped, so families above a certain income level don’t get it either. Nonetheless, offering middle class families extra child care assistance sounds great in a speech.

Given the current economic and deficit picture, we expect tomorrow’s State of the Union address to place more emphasis on proposals like the child care credit expansion, and less on health care reform and cap and trade.

Sometimes, Congress meets a deadline. Six weeks ago, congressional leadership and the new Obama Administration had set out the Presidents’ Day recess as the deadline for getting the economic stimulus package to the President’s desk.

With the House’s vote on final passage today and the Senate expected to consider the bill as early as this evening, all indications are they’ll make it. Here’s a quick summary of the $789 billion package as outlined by the conferees:

$301 billion in family and business tax relief (down from $350 billion in the Senate bill).

$70 billion in renewable and energy efficiency provisions.

$140 billion in higher payments to states through Medicaid and a new State Fiscal Stabilization Fund.

Here’s a full summary of the Ways and Means and Finance Committee portions of the package and the final JCT table.

Built-In Gains Relief in Final Stimulus Package!

A provision to provide built-in gains relief to hundreds of thousands of S corporations is part of the final stimulus package moving through Congress. The President is expected to sign the package into law early next week.

Once he does, firms that converted to S corporation or existing S corporations that acquired other businesses in the years 2000, 2001, 2002 and — beginning next year — 2003 will be able to dispose of built-in gains assets without paying the punitive level of tax.

This provision, which originated in the Senate and was championed by Senators Blanche Lincoln (D-AR), Orrin Hatch (R-UT), Olympia Snowe (R-ME), Mike Enzi (R-WY) and Ben Cardin (D-MD), survived the conference process between the House and Senate due in large part to our S-CORP Champions in Congress including key House advocates Representatives Ron Kind (D-WI), Steve Kagen (D-WI), Nydia Velazquez (D-NY), Allyson Schwartz (D-PA), and Danny Davis (D-IL). Our House allies sent a letter to House Leadership this week urging for the inclusion of the Senate’s BIG relief provision.

S-CORP Chairman Dick Roderick noted, “Built-in gains relief has been a priority of the S Corporation Association for years. Congress’ adoption of this provision is the result of lots of hard work educating policymakers on the importance of allowing closely-held businesses access to their own capital.”

Roderick also had words of praise for Senator Lincoln and Representative Kind. “Senator Lincoln and Representative Kind have worked tirelessly to improve S corporation rules. They really understand the important role closely-held businesses play in economic growth and job creation.”

The Washington Post reports that the Senate Stimulus bill is short of the 60 votes needed for it to move through the chamber. As the Post noted:

Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.

The vote in the House did not help, with all Republicans and 11 Democrats opposing the House version of the package. The unified Republican opposition in the House will likely empower Republicans in the Senate to stand together as well.

But the opposition rests not just with Republicans. Some Democratic members have expressed opposition as well. $800 billion in new spending and tax relief is a huge package, especially with the deficit already projected to exceed $1.1 trillion in 2009.

So what’s likely to happen? Look for moderates in both parties to put together a list of spending items that need to be cut in order for them to support the remaining package. As the Post reports:

Nelson said he and Collins have agreed to “tens of billions” in cuts, although he said he is skeptical that the effort will reach Collins’s target of $200 billion in reductions. The pair has counted up to 20 allies in their effort, with more Democrats than Republicans at this point.

Whether Senators Susan Collins (R-ME) and Ben Nelson (D-NE) find the right balance, or another group of Senators come to the table, we expect a compromise to be worked out over the next couple days. The Senate may be in this weekend, but it’s unlikely to leave without passing some form of the package first.

S Corps Lose an Ally

The S corporation community lost one of its greatest advocates the other day with the passing of Don Alexander. As our friend Martin Vaughn with Dow Jones reports:

Donald C. Alexander, who served as Internal Revenue Service Commissioner from 1973 to 1977, died Monday night at 87. Besides leading the IRS, Alexander held a wide range of other public service positions, including serving on the Commission on Federal Paperwork and as commissioner of the Martin Luther King Jr. Federal Holiday Commission. He was director of the U.S. Chamber of Commerce for five years in the 1980s. Most recently, Alexander was a partner at the law firm of Akin Gump Strauss Hauer and Feld LLP, from 1993 until his death. He was awarded the Silver Star and the Bronze Star for service in the 14th Armored Division during World War II.

Don was always a southern gentleman, and he was always focused on improving the rules for S corporations. He testified on behalf of the community before Congress many times. Here is just one sample of his views.